Has Housing Construction Really Bottomed? | John Burns Real Estate Consulting

Has Housing Construction Really Bottomed?

While the Census Bureau reported last week that housing starts surged month-over-month, these headline-grabbing numbers are the seasonally adjusted data, which can fluctuate wildly. They often create great headlines because of the significant changes each month.

A better way to look at construction activity is on a rolling 12-month basis, using the non-seasonally adjusted data. When the line starts to flatten, construction activity will be close to matching the same month from the prior year. When construction is close to running flat year-over-year, you can expect that we are near the bottom in construction.

Our forecast calls for housing starts to remain extremely low compared to history through 2010, followed by a steady recovery in 2011. Anecdotally, this makes sense too, for the following reasons:

  • Community Count: Most of our large home builder clients confirm that they will have fewer communities open next year,
  • Land Buying: Although distressed land buying activity is picking up, thus far the activity has been insignificant, and
  • Construction Financing: Most of our private home builder clients confirm that construction financing is very difficult to obtain.

Currently at just over 650,000 starts, the rolling 12-month total should drop below 470,000 this year, with slight improvement in 2010. We have modeled the shape of our recovery forecast as one that is slightly more aggressive than the recovery in Houston in the mid 1980s and in Southern California in the mid 1990s. Our forecast looks like this:

Our most bearish clients argue that our forecast is too optimistic, and they point to the horrible outlook for the economy and to housing vacancy statistics that show that there are more than 1 million excess vacant homes. While we wholeheartedly agree that there does not need to be more shelter constructed for purely shelter reasons, there are other drivers:

  • Builder Needs: Public and private home builders are going to keep building because that is what they do for a living. Many of the public builders need to grow their businesses to refinance the billions of dollars of debt coming due in a few years.
  • Bank Selling: At some point, the banks will be selling REO finished lots at prices where builders can make money building homes.
  • Custom Homes: There are still plenty of people who have enough money to build their dream home or their second home.
  • Location: There are plenty of desirable neighborhoods without significant distress and where construction makes sense. New construction in outlying areas will ground to halt, while construction near employment centers and in areas with good schools will continue.

We are currently at the lowest level of construction on record since the Census Bureau began tracking construction statistics in 1959. In fact, the current rolling 12-month starts total is nearly 40% below the 12-month total through July 1975 – the lowest level from previous cycles. We think we can claw our way back to 982,600 units per year by 2013. While this is more than twice the level of our forecast for 2009, 2013’s projected construction level is still lower than 49 of the last 50 years (only 2008 is lower).

Economic Growth………………………………………………………………….D
The economic growth indicators remain extremely weak this month. The employment sector continued to decline, with 5.2 million payroll jobs (-4.2%) lost in the last year. The most recent headline unemployment rate reached 9.5% – its highest level since 1983 – while the real unemployment rate (including part-time workers looking for full-time work) increased to 16.5%. Mass layoff events – job cuts of more than 50 jobs – fell slightly for the month, but remain up 72% year-over-year. The final revision of first-quarter real GDP growth showed an annual drop of -5.5%, which was one of the largest declines since the early 1980s. The Core CPI (all items less food and energy) declined to 1.8%, while the Full CPI fell to -1.3%, marking only the third time in the 54-year history of the index that it has fallen below zero.

Leading Indicators…………………………………………………………………D
Continued improvements in the leading indicators suggest that economic stability is coming. Stock gains in June were modest in comparison to the gains in March, April and May. The Dow Jones index fell slightly for the month, while the S&P 500 was flat. The NASDAQ gained 3.4% for the month and the Wilshire 5000 rose 1.1%. Homebuilder stocks experienced their second month of decline following an improvement in April and have now declined 17% year-over-year. The Leading Economic Index continued to improve, reaching an annual rate of 2.4% in May from -0.8% in April – the highest level in almost two years, and the first time the index has turned positive in more than 18 months. The price of crude oil, which had been generally declining since September 2008, has spiked in recent months, reaching a monthly average of $69.68 per barrel in June.

Affordability worsened slightly this past month, as both mortgage rates and home prices increased. As a result, the housing-cost-to-income ratio increased slightly to 26.8%, but remained well below the peak of 44% during this housing cycle. The median-home-price-to-income ratio also remains very attractive at its current value of 3.2, as compared to its historical average of 3.7. The 30-year fixed mortgage rate jumped to 5.42% by June month-end. The share of ARM applications increased to 4.3% in the last week of June, according to the Mortgage Bankers Association, well below the peak levels above 35% of total loans in early 2005.

Consumer Behavior………………………………………………………………..D-
Consumer behavior took a step back this month. The Consumer Confidence Index dropped to 49.3 in June, following three months of significant improvement. Consumer Confidence still remains well below its historical average, however. The Consumer Comfort Index also fell in June, while the Consumer Sentiment Index showed improvement. Americans are increasingly saving more of their paycheck as the personal savings rate increased 6.9% year-over-year for a total of $769 billion in savings – the highest level since 1993. Since the recession started, the U.S. has been hammered with falling home prices and a crumbling stock market, resulting in a loss of more than $10 trillion of wealth in the past year and equal to a total U.S. net worth of $50.4 trillion in the first quarter of 2009.

Existing Home Market……………………………………………………………..D
Despite some initial signs of optimism in the economy, the existing home market remains weak. The seasonally adjusted annual existing home sales volume increased slightly to 4.77 million transactions, which is down 3.6% year-over-year, according to the National Association of Realtors (NAR). The median resale home sale price increased in May to $172,900, according to NAR, but has fallen 16% from one year ago. In comparison, the Case-Shiller index, which tracks paired sales, fell a record 19% in the first quarter compared to the first quarter of 2008. The supply of unsold homes fell in May to 9.6 months of supply, yet remains high compared to historical levels. The pending home sales volume remained essentially flat from the previous month, but is up nearly 7% year-over-year.

New Home Market………………………………………………………………….D-
The new home market remains abysmal, yet some indicators have improved recently. Builder confidence increased this month, after falling slightly last month, with the Housing Market Index rising to 17. The median new home price experienced an upswing, reaching $212,600 according to the Census Bureau, and now remains down just 3.4% year-over-year. The annualized new home sales volume remained relatively flat compared to last month, yet has fallen 33% year-over-year to 342,000 transactions. The overall inventory of new homes declined again in May, currently representing 10.2 months of supply, which is still well above the historical average of approximately 6 months.

Housing Supply…………………………………………………………………..F
The overall supply of housing increased slightly from last month’s low levels. Seasonally adjusted single-family starts spiked in June, while multifamily declined, pushing total starts to 582,000 units. Both single-family and multifamily permits increased in June, reaching 430,000 total permits. However, permit levels remain down 29% year-over-year and near their lowest level since the Census Bureau began recording permit statistics in 1960. The annual new home completion volume declined in May to 811,000 units and has fallen 15% over the last 12 months. First-quarter homeowner vacancy fell to 2.7%, which is well above the long-term average of 1.5%.

Data Current Through July 20, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -5.5% D-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -5,842,000 D-
Employment Growth Rate
– Non-ag Payroll, NSA -4.2% D-
Unemployment Rate 9.5% F
Mass Layoff Events, SA (YOY % Change) 72.4% D
Productivity 1.6% C
Retail Sales -9.5% F
Core CPI 1.8% B+
Full CPI -1.3% C+
Personal Income Growth, nominal 0.3% F
Federal Deficit (last 12 mos., $mil curr.) -$1,299,552 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,368,000
Owned Households 74,942,000
Rented Households 36,426,000
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 2.4% C
ECRI Leading Index 4.0% C
Manpower Net Employment Outlook -2% F
U.S. Average Hours Worked per Week 33.0
Temporary Employed Workers -27.9% F
Corporate Profit Growth (pre-tax) -18.0% F
Residential Investment as % of GDP (nominal) 2.7% F
Interest Rate Spread
10-year Treasury 3.63%
2-year Treasury 1.14%
Interest Rate Spread 2.49% B+
3-month LIBOR 0.62%
3-month Treasury 0.18%
TED Spread 0.44% C
Stock Market (Return over last 12 months)
Dow Jones -26% D
S&P 500 -28% D-
Wilshire 5000 -28% D-
S&P Super Homebuilding -17% D
Tougher Standards on Business Loans – Large Firms 64% F
Tougher Standards on Business Loans – Small Firms 69% F
Crude Oil Price (Current $) $69.68 D+
ISM Manufacturing Index 44.8 D+
ISM Non-Manufacturing Business Activity Index 49.8 D+
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Housing Cycle Barometer 0.5 A+
US Median Home Payment / Income Ratio 26.8%
US Median Home Price / Income Ratio 3.2 A
Mortgage Rates, Fixed 5.42% A
Mortgage Rates, Adjustable 4.93% B
Fixed/Adjustable Spread 0.49% F
Fixed/10-year Spread 1.79% C
Fed Funds Rate 0.13%
Percentage of Adjust. Loans 4.3% A-
Equity/Owned Home (Current $) $98,815 C
Debt % in Home (LTV) 58.6% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 49.3 D-
Consumer Sentiment Index 70.8 D
Consumer Comfort Index -50.0 F
Revolving Cons. Credit per Household $7,803
– Growth Rate -4.6% A+
Personal Savings Rate 6.9% C
U.S. Net Worth Growth Rate -16.2% F
Financial Obligation Ratio 18.5% D
Misery Index (Unemployment + Inflation) 8.10 C+
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -19.1% F
NAR Single-Family Median Home Price $172,900
NAR Single-Family Annual Price Appreciation -16.1% F
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 4,770,000 B-
Existing Home Inventory for Sale, SA 3,798,000 D-
Months Supply of Unsold Homes, SA 9.6 D+
Purchase Mort. App. Index, SA 267.7 C
Pending Home Sales Index, SA 90.7 D
Homeownership Rate 67.3% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 17 F
Multifamily Condo Market Index 15 F
Median Price, NSA $221,600
Annual Appreciation Rate -3.4% D
Constant Quality Price Index (YOY % Change) -7.6% F
Sales Volume, SA 342,000 F
New Home Inventory for Sale, NSA 289,000 B-
Months Supply of Unsold Homes, SA 10.2 D-
Months of Homes Completed, SA 4.8 D-
Months of Homes Under Const., SA 3.9 C-
Months of Homes Not Started, SA 1.5 D
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 811,000 F
Single-Family Starts, SA 470,000 F
Multifamily Starts, SA 112,000 F
Total Starts, SA 582,000 F
Single-Family Permits, SA 430,000 F
Multifamily Permits, SA 133,000 F
Total Permits, SA 563,000 F
Manuf. Housing Placements, SA 53,000 F
Total Supply, SA 563,000 F
Total Housing Stock 130,429,000
Homeowner Vacancy Rate 2.7% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are “A” scores, the average is a “C”, and the worst 15% ever are “F” scores, with distributions throughout.


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